Estimating the income elasticity of demand for international air travel : the financial crisis and its effect on irish income

Abstract: During the 2008 financial crisis, aggregate income along with the number of air travellers in Ireland both decreased significantly. This thesis aims to estimate the income elasticity of demand for international air travel in Ireland using a difference-in-differences instrumental variables model (DID/IV), where Norway is used as a control group and the financial crisis serves as an exogenous instrument for a change in income. Using this exogenous variation caused by the crisis as an instrumental variable for the effect of income on international passenger numbers generates income elasticity estimates of between 4.645 to 9.310. This implies that a 1% change in income leads to a 4.645% to 9.310% change in the demand for international air travel. Assuming that aggregate incomes are rising over time, then the findings of this study suggest that international air passenger numbers will increase significantly. This will have important implications for policymakers aiming to reduce the future amount of carbon emissions being released into the Earth’s atmosphere.